PMI Cancellation and an Increase in Value of Property

Your home's value is an important factor in determining the financing that's available to you. Lender's consider you less risky when your property's value exceeds its loan balance by at least 20 percent. The difference between the loan amount and value is known as equity, or appreciation. Lenders require you to pay private mortgage insurance, or PMI, when you have less than 20 percent equity. Other than gaining more than 20 percent equity through payments, getting rid of PMI entails an increase in property value.

PMI Cancellation

Federal law and conventional lenders determine when you can stop paying PMI. Under the Homeowners Protection Act, the lender must automatically cancel the coverage when you have paid down your loan to 78 percent of its original balance. Although the 78-percent benchmark doesn't depend on your home's current market value, the lender may require an appraisal to ensure that your home's value has not fallen since loan origination. To initiate PMI cancellation, the lender requires you to meet guidelines set by Fannie Mae and Freddie Mac, which buy and sell a majority of home loans. Cancellation is based on either the value of your home at origination or its current value. You need at least 20 percent or 25 percent equity, depending on the property type and loan you have.

Appraisals

Lenders determine if your home's value has increased sufficiently with an appraisal. A licensed appraiser, usually hired by the lender, walks through your home and compares it to recent sales in your area to arrive at a value. You pay about $350 out-of-pocket for the report. Because an insufficient value may cause your lender to deny your PMI cancellation request, you can get a ballpark value before paying for an appraisal to find out if you have a good shot. Keep an eye on home sales in your area or consult a real estate agent or appraiser to get a preliminary opinion of value, Bankrate.com advises.

LTV Tips

To informally figure out if your home meets your lender's equity requirements for PMI cancellation, calculate your loan-to-value ratio, or LTV -- the amount financed relative to value. You'll need to divide your current loan balance by your estimated home value to get your LTV as a fraction, which you convert to a percentage. For example, if you owe $80,000 on a home valued at $100,000, your LTV is .8, or 80 percent. As a rule of thumb, you have a good chance of removing PMI if you multiply your loan balance by 1.25 and the product equals or exceeds your home's value. This means that you have at least 25 percent equity.

Considerations

Your lender considers factors other than an increase in home value when deciding whether to cancel PMI. It may require you to make payments on the loan for at least two years, advises Nolo. It also reviews your payment history to ensure you are not at high-risk of default. A 30-day late payment in the past year or 60-day late payment over the past two years usually disqualifies you from cancelling PMI, GoodMortgage.com says.